Abstract
This study proposes a cumulative error correction model where the summing weights follow a geometrically decreasing function of prior deviations from the equilibrium and are estimated from the data. It is shown that this approach nests both the traditional error correction model – where no weight is given to deviations from the steady state prior to the most recent period – and the error correction model based on the idea of multicointegration.The form of accumulation presented here does not change the order of integration of the series, as is the case in the multicointegration approach of Granger and Lee (1989). Furthermore, it is very parsimonious as only one or two parameters more have to be estimated. The assumption of geometrically decreasing weights can be tested by estimating the model in its unrestricted form.Based on this new model type, the relationship between private consumption and real disposable income of private households in the US is estimated. The short-term forces which set off the most recent period's deviations are much smaller than would be suggested by a VEC and a conventional single equation ECM, and the income elasticity is lower as well. The proposed model outperforms the other two with respect to its forecasting power.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.